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Discretion Rather than Rules? Binding Commitments versus Discretionary Policymaking

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  • Jensen, Christian

Abstract

Because optimal plans are time-inconsistent, continuing one from a previous period is not optimal from today's perspective, and may not outperform discretion, even ignoring gains from surprise deviations. Hence, contrary to conventional wisdom, a binding and credible commitment does not always outperform discretion over time, even if a non-credible commitment does. Forward-looking policymakers might therefore not want to irrevocably bind themselves to the optimal plan from any particular period, even if they could. The vast literature proposing different commitment mechanisms illustrates that it is a common misconception that a credible commitment to the optimal plan is always preferable to discretion.

Suggested Citation

  • Jensen, Christian, 2016. "Discretion Rather than Rules? Binding Commitments versus Discretionary Policymaking," MPRA Paper 76838, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:76838
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    File URL: https://mpra.ub.uni-muenchen.de/76838/1/MPRA_paper_76838.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Commitment; discretion; policy rules; expectations;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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